RBI STEPS IN REGULATING CRYPTOCURRENCY

Mid Semester Assignment No. - 1

SUBMITTED TO

AMITY LAW SCHOOL, MUMBAI

FOR THE PART FULLFILMENT OF

[COURSE - SEMESTER]

By [Student Name] Enrolment No.

UNDER THE GUIDANCE OF

[Faculty Name]

AMITY LAW SCHOOL

 Table of Contents
Declaration..................................................................................................................................................3
Table of Cases.............................................................................................................................................4
Abbreviation................................................................................................................................................4
Introduction.................................................................................................................................................5
Reserve Bank of India’s Stance in Regulating Cryptocurrency...................................................................7
Relevance of the SC Judgment on March 4, 2020.....................................................................................10
Conclusion and Recommendations: The Road forward.............................................................................12
References.................................................................................................................................................13
 Declaration
I declare that this assignment entitled “TITLE” is my own work completed under the
supervision of [Faculty Name]. This assignment is based on my personal study and/or research
and that I have acknowledged all material and sources used in its preparation, whether they be
books, articles, reports, lecture notes, and any other kind of document, electronic or personal
communication. I also certify that this assignment has not previously been submitted for
assessment in any other unit, except where specific permission has been granted from all unit
coordinators involved, or at any other time in this unit, and that I have not copied in part or
whole or otherwise plagiarized the work of other students and/or persons.

Date:

Student name

Enrolment No.:
 Table of Cases
SNo. Case Name Page No.

1. Internet and Mobile Association of 7.

India v. Reserve Bank of India, Writ
Petition (Civil) No.528 of 2018.

Abbreviation
VC Virtual Currency

DC Digital Currency

RBI Reserve Bank of India

FR Fundamental Rights

Art. Article

WP Writ Petition

No. Number

Chapter-1
 Introduction

One might not be e exaggerating if he states that the gravitas of crypto-currency of Generation Y
has not been assimilated by the earlier generations of global investors. Christine Lagarde, the
then IMF Managing director has stated that the dizzying gyrations of crypto assets like bitcoin
can easily be compared with the tulip mania sweeping the 17th century of Holland as well as the
most recent dotcom bubble. She also stated that since above 1600 crypto assets are in regulation,
many will not be able to survive the destruction in the creative sphere.1

As the earlier emergence of cryptocurrency can be traced to 1998 when Wei Dai had discussed
of digital money as an idea, it's practical emergence can be traced to 2008 when in the month of
October, Satoshi Nakamoto had written a paper named "Bitcoin: A Peer to Peer Electronic Cash
System."2

Broadly stating, cryptocurrency can be termed as money in digital form that shapes into coins or
tokens. The prefix of the term i.e. crypto has its traces in the term cryptography which meant the
creating and processing of currencies in the digital sphere and they being transacted across
systems that are decentralised. Cryptocurrencies are primarily developed as codes by teams
which build in the mechanism for insurance as well as several other controls. The price of
Bitcoin has increased more than 700 times in the last 5 years as well as there are 35 Bitcoin
exchange markets at least where the prices of the Bitcoin are quoted in a standard currency form
and every such daily transaction has a volume of over 1 million USD.3

Intriguingly, although the reach of crypto-currencies was restricted to a comparatively closed

group until about 2016, the market for crypto-currencies has grown steadily since the beginning
of 2017. Regulators were quite cagey on their financial stability consequences, in view of their
success. Inhibitions of various degrees were thus demonstrated by different countries. No
exception was India. The Reserve Bank of India (RBI) released a circular on April 6 2018 after

1
Lagarde, Christine, “An Even-handed Approach to Crypto-Assets”, IMF BLOG (16TH January, 2021, 10:25
AM), https://blogs.imf.org/2018/04/16/an-even-handed-approach-to-crypto-assets/.
2
Satoshi Nakamoto, Bitcoin: A Peer to Peer Electronic Cash System, BITCOIN (16th January, 2021, 10:50 PM),
https://bitcoin.org/bitcoin.pdf.
3
Pichl, Lukas and Taisei Kaizoji, “Volatility Analysis of Bitcoin Price Time Series”, QUANTITATIVE FINANCE AND
ECONOMICS(16th January, 2021, 10:50
PM), https://www.researchgate.net/publication/321827427_Volatility_Analysis_of_Bitcoin_Price_Time_Series.
an initial period of informal guidance banning all commercial banks from engaging with what
RBI referred to as "virtual currencies" (VCs). More recently, on March 4, 2020, this RBI circular
was set aside by the SC in a judgment. The VC community has been filled with excitement in
regards to this judgement.

The rationale of RBI behind prohibition of VCs, the regulatory landscape in this regard, the
contribution of SC judgement for VCs in India and other key aspects will be taken into
consideration in this article.

Chapter-2
 Reserve Bank of India’s Stance in Regulating Cryptocurrency

The authorities of India have never considered cryptocurrency as a legal tender or coin. The
businesses that had a base of cryptocurrencies flourished during the mid 2010s because there
were no regulatory norms as such. Trading volumes reached new heights by the end of March
2018 being 50 million to 60 million USD per day in number.4

Several regulatory bodies in India including the RBI found this development to be somewhat
discomfiting. A warning was issued by RBI accordingly stating to the populace about the risks in
regards to cryptocurrencies, in December, 2013. Later in December, 2016, with the help of a
stability report in the financial sector, RBI mentioned that a standbox10 and innovation hubs
word to be established for better understanding and backing in the development of sector of new
instruments and services in financial streams.5 The concerns and risks involving virtual
currencies were also highlighted in the report as well as the report dealt with monetary policy’s
effectiveness and crimes in financial sector.

On 1st February, 2017, a notice was issued again by the RBI to the populace at large in regards
to the usage and risks of cryptocurrency. On 25th July, 2017, a report was released by the inter-
disciplinary committee on VCs and measures to regulate the same. Distinguishing factors
between the distributed ledger technology and cryptocurrency has been clearly laid down in the
report. Recommendation of the interdisciplinary committee was that there should be a
prohibition in an explicit manner, on the usage, hold and trade of cryptocurrencies of any sort.
Positive recommendation of the committee was also in regards to the underline distributed ledger
technology and its potential usage apart from creating or trading in cryptocurrency. On 5th
December, 2017, the concerns in regards to the usage of cryptocurrency were iterated by the RBI
through its notice.6

4
Nishit Desai, The Virtual Currency Regulation Review, THE LAW REVIEWS (16th January, 2021, 11:30 PM),
http://www.nishithdesai.com/fileadmin/user_upload/pdfs/NDA%20In%20The%20Media/News
%20Articles/181207_A_The-Virtual-Currency-Regulation-Review-India.pdf.
5
RBI, Press Releases Financial Stability Report- December, 2013, RBI (17th January, 2021, 2:30 PM),
https://www.rbi.org.in/SCRIPTs/BS_PressReleaseDisplay.aspx?prid=30280
6
Diganth Raj Sehgal, RBI and Cryptocurrency: The Story so far, IPLEADERS (Jan 18, 2021, 11:21 AM),
https://blog.ipleaders.in/rbi-and-cryptocurrency-the-story-so-far/.
Finally on 5th April 2018, the RBI in its Statement on Developmental and Regulatory Policies
stated about ring-fencing regulated entities from VCs and stated further that:

VCs, also known as crypto assets or cryptocurrency, raise concerns about protecting the
consumers, market integrity and money laundering, among others. Users, holders and trader of
VCs have been repeatedly cautioned by the RBI in regards to various risks involved in dealing
with VCs. In regards to the associated risks, it is opined that, entities that are RBI regulated shall
not be dealing with or involve in provision of services to anyone in person or business
organisations dealing with or settling VCs, with immediate effect.7

Therefore, on the subsequent day, i.e. on 6th Apr 2018, the RBI released a circular where
it prohibited the dealing of virtual currencies of all entities controlled by the RBI. "In particular,
the prohibition was inclusive of "keeping accounts, registering, selling, settling, clearing, lending
against virtual tokens, taking them as collateral, opening exchange accounts dealing with them,
and transferring/receiving cash in VC purchase/sale accounts (The exercise of power is granted
and such instructions are issued by sec. 35 A ( r/w s. 36(1)(a), and s.56 of Banking Regulation
Act, 1949, s. 45JA and s. 45L of the RBI Act, 1934 & s. 10(2) r/w s.18 of Payment and
Settlement Systems Act, 2007). Regulated entities who have already supplied those resources
have been invited to depart the partnership over the next three months.

While the restriction did not spread beyond the institutions controlled by the RBI, new
companies dealing with crypto-currencies were choked by the lack of access to finance, banking
facilities such as managing deposits, trading, payment settlement, or access to credit.8

Further, on 5th December, 2019, RBI governor stated on a question on stance of RBI on
cryptocurrency in Monetary Policy Press Conference:

There are two aspects in regards to digital currency (DC). One of them is private DC which RBI
is clearly against. He also stated that it is not just RBI which opposes it but also the central
government and banks across the world are against the idea of it. currency issuance is a function
of the sovereign and it is to be done by the same. Something that is there in the sovereign domain
7
RBI, Statement on Development of Regulatory Policies, RESERVE BANK OF INDIA (Jan 17, 2021, 1:21 PM),
https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR264270719E5CB28249D7BCE07C5B3196C904.PDF.
8
Ramani Ramchandran, Steps that will help India stay in the crypto race, LIVEMINT (Jan 17, 2021, 12:11 PM),
https://www.livemint.com/opinion/columns/steps-that-will-help-india-stay-in-the-crypto-race-
11607875218551.html.
cannot be overwritten by private currency. There are several challenges in regards to money
laundering and other aspects. It is very early in regards to digital currency being issued by central
bank. Several discussions in regards to the same are going on. The technology in regards to the
same is evolving with time. After careful examination internally in the RBI, it has been opined
that such idea is still in its inception. Other Central Banks have also been a part of the discussion.
Central Bank digital currency is too early to be talked about. When the appropriate time and
safeguards evolve, the RBI will definitely look into the matter in a serious way.9

The SCs judgement of March 4, 2020 holds critical significance in this regard.

Chapter-3

Relevance of the SC Judgment on March 4, 2020.

9
RBI, Edited Transcript of RBI’s Fifth Bi-Monthly Monetary Policy Press Conference, RESERVE BANK OF INDIA
(Jan 17, 2021, 1:21 PM), https://www.rbi.org.in/scripts/bs_viewcontent.aspx?Id=3798.
The Supreme Court, on 4th March 2020, gave a verdict regarding the RBI’s guidelines that
prohibited the financial institution to deal with anybody that deal with the cryptocurrency and
any related activities.10 According to the Supreme Court in the judgment, Article 19(1)(g) had
been violated by the RBI. The aforementioned Article of the Indian Constitution gives the
citizens of India the basic freedom to pursue any profession. The apex court was of the opinion
that the cryptocurrency was not unlawful in India and hence, the RBI can’t deny the dealing of
the Financial Institution to deal with the cryptocurrency. It also said that the argument made by
the RBI related to financial crimes is not based on any empirical data. Furthermore, no
alternative measures have been suggested by the RBI. However, the court was cautious to note
that the “people who investing into the cryptocurrency only for the purpose of hobby will not be
covered under the Art. 19(1)(g) of the Constitution since the article only covers people who are
there for profession, occupation, trade or business.”

The RBI and Inter-ministerial group have submitted evident proof that the ;distributed ledger
technology’ and the ‘cryptocurrency’ are two distinct entities. The latter is merely a ‘by-product’
of the former. Apex Court also recognised that the VCs cannot be regarded as the legal tender
after having read all the language. Money has three primary functions according to the verdict;' it
includes, namely (1) an exchange medium (2) a unit of account and (3) a value store. Finally, a
fourth feature, namely that of being a final debt waiver or deferred payment standard, was also
introduced. The cryptocurrency tick box all of the above except the fourth functionality.
Cryptocurrency fulfils the currency's functionality, and the RBI is allowed to control it in any
cryptocurrency. According to the Apex court, virtual currency users and traders are engaged in
an activity that comes under the jurisdiction of the RBI.11

This judgment stated that, notwithstanding that operation that is not part of the system of credit
or system of payment, anything that could threaten or affect the country's financial system can be
regulated or prohibited by RBI. The verdict has also enhanced the RBI's regulatory authority and
any legislative and executive interference on the basis of financial resources. The verdict
therefore gives way to the proposed bill prohibiting any cryptocurrencies activities in parliament,

10
Internet and Mobile Association of India v. Reserve Bank of India, Writ Petition (Civil) No.528 of 2018.
11
Id.
which will neither violate the provisions of the ruling nor violate FR of person under the Art
19(1)(g).12

Chapter-4

Conclusion and Recommendations: The Road forward

12
Anirudh, Internet and Mobile Association of India v. Reserve Bank of India, LEGAL SERVICES INDIA (Jan 17,
2021, 3:44 PM), http://www.legalserviceindia.com/legal/article-3912-internet-and-mobile-association-of-india-v-
reserve-bank-of-india.html#:~:text=Reserve%20Bank%20Of%20India,-By%20Anirudh%20%7C
%20Views&text=In%20a%20judgment%20of%20Supreme,by%20Reserve%20Bank%20of%20India.
 This ruling could cause a spurt in the now dying market while acknowledging RBI's crypto
assets market jurisdiction. In this respect, however, much depends on the laws and legislation. A
proposed "Banning of Cryptocurrency and Regulating the Official Digital Currency Bill 2019"
has already been prepared by the government of India in August 2019. The Bill suggested that
cryptocurrency mining, holding, sale, trading, issuance, disposal or use in India be prohibited. 13
Whilst the proposed Bill imposes a fine, or imprisonment, of a maximum of 10 years, for
mining; owning; selling; issuing; transmitting or using cryptocurrency, or both, it provides that
the central government may issue the digital rupee in consultation with the RBI as a legal tender. 
In the winter session of parliament in November – December 2019, however, the government
abstained from adopting the proposed bill. A number of unknown variables will affect the future
of cryptocurrency in India. Illustratively, we are not sure whether in the days ahead the Digital
Money Central Bank will replace the cryptocurrencies. How will the market participants deal
with regulators/legislative actions? How will the international organizations such as G-20 or
FATF react to it? Its future will depend upon the result of the cat and mouse game between the
regulator and the market players.   

References
 Lagarde, Christine, “An Even-handed Approach to Crypto-Assets”, IMF BLOG (16TH January,
2021, 10:25 AM), https://blogs.imf.org/2018/04/16/an-even-handed-approach-to-crypto-assets/.

13
Ministry of Finance, Draft Banning of Cryptocurrency & Regulation of Official Digital Currency Bill, 2019, PRS
INDIA(Jan 17, 2021, 5:23 PM), https://www.prsindia.org/billtrack/draft-banning-cryptocurrency-regulation-official-
digital-currency-bill-2019.
 Satoshi Nakamoto, Bitcoin: A Peer to Peer Electronic Cash System, BITCOIN (16th January,
2021, 10:50 PM), https://bitcoin.org/bitcoin.pdf.
 Pichl, Lukas and Taisei Kaizoji, “Volatility Analysis of Bitcoin Price Time Series”,
QUANTITATIVE FINANCE AND ECONOMICS(16th January, 2021, 10:50
PM), https://www.researchgate.net/publication/321827427_Volatility_Analysis_of_Bitcoin_Pric
e_Time_Series.
 Nishit Desai, The Virtual Currency Regulation Review, THE LAW REVIEWS (16th January, 2021,
11:30 PM), http://www.nishithdesai.com/fileadmin/user_upload/pdfs/NDA%20In%20The
%20Media/News%20Articles/181207_A_The-Virtual-Currency-Regulation-Review-India.pdf.
 RBI, Press Releases Financial Stability Report- December, 2013, RBI (17th January, 2021, 2:30
PM), https://www.rbi.org.in/SCRIPTs/BS_PressReleaseDisplay.aspx?prid=30280
 Diganth Raj Sehgal, RBI and Cryptocurrency: The Story so far, IPLEADERS (Jan 18, 2021, 11:21
AM), https://blog.ipleaders.in/rbi-and-cryptocurrency-the-story-so-far/.
 RBI, Statement on Development of Regulatory Policies, RESERVE BANK OF INDIA (Jan 17, 2021,
1:21 PM),
https://rbidocs.rbi.org.in/rdocs/PressRelease/PDFs/PR264270719E5CB28249D7BCE07C5B319
6C904.PDF.
 Ramani Ramchandran, Steps that will help India stay in the crypto race, LIVEMINT (Jan 17,
2021, 12:11 PM), https://www.livemint.com/opinion/columns/steps-that-will-help-india-stay-in-
the-crypto-race-11607875218551.html.
 RBI, Edited Transcript of RBI’s Fifth Bi-Monthly Monetary Policy Press Conference, RESERVE
BANK OF INDIA (Jan 17, 2021, 1:21 PM), https://www.rbi.org.in/scripts/bs_viewcontent.aspx?
Id=3798.
 Anirudh, Internet and Mobile Association of India v. Reserve Bank of India, LEGAL SERVICES
INDIA (Jan 17, 2021, 3:44 PM), http://www.legalserviceindia.com/legal/article-3912-internet-
and-mobile-association-of-india-v-reserve-bank-of-india.html#:~:text=Reserve%20Bank%20Of
%20India,-By%20Anirudh%20%7C%20Views&text=In%20a%20judgment%20of
%20Supreme,by%20Reserve%20Bank%20of%20India.
 Ministry of Finance, Draft Banning of Cryptocurrency & Regulation of Official Digital
Currency Bill, 2019, PRS INDIA(Jan 17, 2021, 5:23 PM),
https://www.prsindia.org/billtrack/draft-banning-cryptocurrency-regulation-official-digital-
currency-bill-2019.